So if i'm getting this, they initialise find in some kind of infinite looping state using its own parameters to create and nest directories, and define a halting state from whether it reaches the max number of nested directories where find quits.
I didnt understand the encoding part
Only read the abstract, but if as I suspect it is using nested directories as "cells" in the "tape", the proof will require directories to be able to nest arbitrarily deep (which maybe some filesystems already permit; but even if all existing filesystems have some finite limit, this would not be considered an obstacle to the result, since it's certainly possible to construct a filesystem where directory nesting level is limited only by storage size). That's because it needs to be able to simulate a Turing Machine, which could read and write an infinite amount of storage.
Then, there just needs to be a way to force find to stop in some finite amount of time -- that's the halting state. I don't know what mechanism they use for that, but if I were trying to do this, I would lean towards looking for a way to make it error out.